Analysts at JP Morgan have cut their forecasts but say the banks are still
well-funded

Investment banks are set to suffer a fall in profits this year as the market ructions scare off large trades and deals, according to JP Morgan analysts.

With stock markets plunging in 2016 and many investors baulking at bonds, the pain is piling up for the Wall Street and European banking houses that organise fundraisings and takeovers. Many have already been cutting staff and offices in the years since the 2008 crisis.

Analysts at one such bank, JP Morgan, have now slashed their forecasts for the industry by 20pc for this year, although they noted that the painful decline should stop short of endangering the businesses.

“We see earnings at risk in a challenging credit trading environment, low level of deal flow and lower equity markets with expectations of a stabilisation leading to lower market activity as witnessed historically post sell-off,” analysts said.

However, they added that “there is no liquidity crisis in European investment banks in our view” because the institutions that provide daily funding for the banks are showing no signs of nervousness.

The interest rate benchmark Euribor has not jumped away from the “risk free” overnight index swap set by the European Central Bank, suggesting that the banks remain comfortable lending to one another. Meanwhile, take-up of the ECB’s refinancing operations has risen just 2pc since November.

The analysts have upgraded their ratings for the Wall Street banks Morgan Stanley and Goldman Sachs, which are, alongside their European rivals, hacking back on certain areas such as fixed income trading.

They also said that Deutsche Bank, “the last investment bank standing in Europe”, is unlikely to need a capital-raising and can comfortably pay interest on its debts, despite recent fears in the market that sent its contingent-convertible bonds plunging.

Deutsche Bank's coco bonds, which fell to less than 75 cents on the euro last week, have recovered some ground to near 80 cents. The loss-making bank has already begun a cull of 15,000 jobs worldwide under new boss John Cryan.

“DB is a ‘show me’ stock now in our view. There is a lot of talk of cost cutting, but we have not seen the evidence yet in numbers. We believe DB needs to illustrate every quarter that the cost trend is improving,” said the analysts.